Diamonds regain their lost lustre

Diamonds are "the ultimate luxury good", says Garry White in The Daily Telegraph. So it's no wonder demand plunged when the global recession struck. Polished diamond prices fell by a third as world retail diamond sales fell by a similar amount. Rough diamond prices slid 65% in the six months to March.

But the market now seems to have hit bottom. According to De Beers, the largest rough-diamond producer, demand is rebounding; Rio Tinto has felt confident enough to raise prices recently.

Meanwhile, polished prices have flattened out. Longer term, the outlook for diamond prices is positive. There have been no major diamond-mine discoveries since the 1990s and the easiest pickings are closest to the surface, so supply is constrained. Demand from industrialising Asia will rise along with the region's wealth.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

For now, however, "it is America that counts", because it consumes around half of the world's polished diamonds, says Idexonline.com. Until the US market "heats up", it's hard to see much of a "catalyst" for higher prices.

What's more it's likely to take US consumers some time to get back to their spending ways given their scant savings and heavy debt loads. So the likes of Petra Diamonds (AIM: PDL) look worth tucking away, but may not tick up much for some time.

Gold watch

The dollar is "the main driver fuelling the run in commodities", says MF Global's Edward Meir. So it's no wonder gold has stayed near last week's record above $1,070 an ounce. Jewellery buyers entering the market on dips are also helping gold to establish a new, higher trading range.

Only higher interest rates can prop up the dollar, and they won't come soon, says Leonard Kaplan of Prospector Asset Management. Meanwhile, oil's renewed uptick also points to inflation and is thus good news for gold.